UPDATE 2-UK's Asda promises 1 bln stg investment in price cuts
* Retailer will up investment on price cuts by 40 pct over five years
* Will consider opening convenience stores to grow market share
* Q3 like-for-like sales up 0.3 pct
LONDON, Nov 14 (Reuters) - Supermarket chain Asda, the British arm of Wal-Mart Stores Inc, said it would spend over 1 billion pounds ($1.6 billion) on price cuts and product innovation as it seeks to expand its share of the UK grocery market.
Asda, which runs behind market leader Tesco Plc by annual sales and is battling to fend off a challenge for Britain's No. 2 place from a resurgent J Sainsbury Plc, said it would spend the sum to keep prices below inflation over the next five years.
Setting out its strategic priorities on Thursday under its new slogan "You're better off at Asda", it also said it would invest 250 million pounds in product quality, style and design.
Chief Executive Andy Clarke said that he wanted to set Asda clearly apart from the other three of the "Big Four" retailers, which also include Morrisons, in terms of value.
"We are going to invest 1 billion pounds in retail pricing over the next five years," he said. "You can work out the maths for what that means for our competitors."
He said the company was already increasingly cheaper against its three big rivals and closing the gap with discounter Aldi.
"Our (pricing) gap is already widening versus Tesco, Morrisons and Sainsbury's and narrowing against Aldi."
Asda's price-cutting promise is the latest example of British supermarket operators promoting their money-saving appeal.
Asda said it was cutting prices on regularly bought staples such as fresh produce, milk and bread, but did not give specific examples.
Analyst Clive Black at Shore Capital said Asda's move was sensible because 'Asda Price' was a key virtue of the retailer, but it did not signal the start of a price war.
"We believe that the market should take Asda's message here in its stride, perhaps placing the greatest concern with respect to the implications of its re-statement of price value upon its value-based competitor, Wm. Morrison," he said.
Asda's comments came a day after Sainsbury showed its resilience to tough market conditions with a 7 percent rise in underlying first-half profit, contrasting with a decline at market leader Tesco Plc.
It also said it aimed to improve its core business and reach new customers in Britain, particularly in London and southeast England where it has traditionally been weak.
Chief Executive Andy Clarke told reporters the company was looking at smaller convenience store formats, the fastest-growing channel in the UK grocery sector.
OPPORTUNITY FOR CONVENIENCE
"In the next five years, and towards the end of that time horizon, we will explore the opportunity for convenience, the sub 3,000 square foot retail space that we don't currently trade," he said.
Tesco and Sainsbury have long established convenience businesses and are still investing heavily. Morrisons was slow to enter the market but is now moving aggressively, targeting 100 stores by the end of 2013 and 200 by the end of 2014.
Asda has previously rejected opening convenience stores because it wanted to keep its single pricing model. Tesco and Sainsbury's often charge more in their smaller stores, where overheads can be higher.
Clarke said that Asda would not risk compromising its value credentials if it expanded into convenience stores.
According to monthly data from market researcher Kantar Worldpanel, only Sainsbury and John Lewis's Waitrose among Britain's top six grocers are currently resisting pressure from discounters Aldi and Lidl to expand their market share.
In addition, Asda wants to grow the number of its "Click and Collect" locations - where goods ordered online are collected at a store - to 1,000 from 218. It is targeting online sales of 3 billion pounds by 2018.
The group said on Thursday its sales growth had slowed a touch in its third quarter. Sales from stores open more than a year, excluding fuel and VAT sales tax, rose 0.3 percent in the 13 weeks to Oct. 4.
Though that was a 12th straight quarter of growth, it compares with a second quarter rise of 0.7 percent.
"The market conditions are tough, competition is fierce and our customers' budgets are under intense pressure," Clarke said.
Its parent Wal-Mart Stores forecast a disappointing profit for the holiday season after reporting its third straight quarterly decline in U.S. comparable sales because of fewer shopper visits on Thursday.
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